Trade Deficit Hits All-Time High; Congress Must Act

AmericanEconomicAlert.org ^ | Thursday, March 09, 2006 | Peter Morici

[Willie Green]

For education and discussion only. Not for commercial use.

Today, the Commerce Department announced the January trade deficit was $68.5 billion, up from $65.1 billion in December.

The consensus forecast for January was $66.6 billion. My forecast, published by Reuters, was $68 billion.

The trade deficit exceeds 6 percent of GDP and is weighing down economic growth.

Although petroleum plays a key role, it is certainly not the whole story. Since December 2001, the monthly trade deficit has increased by $42 billion. Petroleum accounts for less than half of that change.

The Wal-Mart effect is broadly apparent. The January trade deficit with China was $17.9 billion, up from $16.3 billion in December

This situation is likely to become worse in the months ahead. The dollar remains at least 40 percent overvalued against the Chinese yuan, and similarly overvalued against other Asia currencies too.

China continues to peg against the dollar. Although China revalued the yuan from 8.28 to 8.11 in July, and announced it would adjust the currency to a basket of currencies, the yuan continues to track the dollar very closely. Currently it is trading at about 8.05.

China appears to be permitting the yuan to rise at a pace of about 3 percent year. Since implicit value of the yuan rises about 5 percent each year, the yuan will remain at least 40 percent overvalued for the foreseeable future. The overvalued dollar will contribute mightily to the U.S. trade deficit until the Bush Administration takes decisive action.

High and rising trade deficits tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower.

Cutting the trade deficit in half would boost employment and productivity enough to raise GDP by $300 billion or about $2000 for every working American.  Workers' wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying good wages and offering decent benefits.

Longer-term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor. Cutting the trade deficit in half would boost U.S. GDP growth by 25 percent a year.

To maintain an undervalued yuan, China purchases about $200 billion dollars in U.S. and foreign securities, which it hoards.  This creates a 33 percent subsidy on Chinese exports.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of these jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

The Bush administration has refused to take action against China.

The Congress is considering several bills which would compel action. Among these is a bipartisan bill by Congressmen Duncan Hunter (R-CA) and Tim Ryan (D-OH). It would add the subsidies provided by currency manipulation to the list of unfair trade practices actionable under U.S. trade law, and permit domestic manufacturers to petition the Department of Commerce and U.S. International Trade Commission for duties on Chinese imports to offset these subsidies.

The time is long past due for legislation like the Hunter-Ryan bill.

[Willie Green]

ping

[putupjob]

Everything is fine. President Bush said so.
Don't worry about the massive debt we have to the Chinese. They're nice people and very understanding. Besides, it's all part of the global economy strategery.

Don't worry, be happy.
Besides, Bob Dole, Bill Clinton, Jimmy Carter, Neil Bush, are either all supporting foreign governments or on the take, or both.
Things are good. And the Republicans are doing such a wonderful jobs. Like drawing up the plans for the gold cards (for life) for illegal aliens.

[JLS]

Right maybe Congress could expropriate some property and scare international asset owners away?

[Lejes Rimul]

If Congress wanted to do something, they would have so by now. Instead, they figure it's in their best immediate interests to subsidize cheap Chinese manufacturing and let their voters' grandkids clean up the mess.

[ex-snook]

Thanks for the ping along.

Obviously Congress should make sure we double the deficit every quarter because it is a sign that our economy is strong and all we give away is paper. [or so it has been reported by free-traders].

However less likely is that Congress will assert that trade means 'we buy from you' and 'you buy from us'. With such a policy Americans would be working in good jobs, our standard of living would increase and China would not be buying out our Government. [the downsize is that political contributing Wall Street investors, who don't claim to be American companies anyway, would be making less money]

[EagleUSA]

Instead, they figure it's in their best immediate interests to subsidize cheap Chinese manufacturing and let their voters' grandkids clean up the mess.
-----
Standard modus operandi for Washington. "Not my problem..let the next guy worry about it." And look where it has taken us...some say it is crazy to think about devaluing the dollar, but don't count it out...it could happen.

[cotton1706]

I've said it before and I'll say it again. We could put a tariff on the imports to produce revenue. A five-ten percent tax on imports is not a trade barrier. It will help to balance the budget, could be used to reduce the income tax and would make some use of this "trade deficit".

[Toddsterpatriot]

Since implicit value of the yuan rises about 5 percent each year, the yuan will remain at least 40 percent overvalued for the foreseeable future. The overvalued dollar will contribute mightily to the U.S. trade deficit until the Bush Administration takes decisive action.

Poor Peter is a little confused. The dollar is overvalued The yuan is undervalued.

Through recession and recovery, the manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of these jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Still confused. Very strong productivity growth would reduce the number of jobs that are regained.

As the following graph shows, we don't produce anything in America anymore. Only $3 trillion last year.

[1rudeboy]

We could always drive our economy right into the ground. It would cure our trade deficit problem in a blink.

[Willie Green]

Related thread: U.S. Monthly Trade Deficit Zooms 5.29% to New Record

Said USBIC's Tonelson, "President Bush may or may not be giving away the nuclear technology store to India. But these trade figures show that the United States keep giving away the economic store."

[Citizen of the Savage Nation]

Congress must act...to do what? Make us more like Germany? Yeah, real great economy there. But hey, they have a huge trade surplus (even if a large percentage of middle class can't afford to buy a car because the taxes are so high).

[Yo-Yo]

Bring back Smoot-Hawley!

[SpaceBar]

No biggie. Sell more government bonds, outsource the manufacturing sector, sue all natural resource exploitation out of existence, import illegal aliens, sell off critical domestic infrastructure to multinational interests, flood the media with useless filler, kiss everyone's ass, and keep the printing presses running. Problem fixed.

[mysterio]

I know how we can fix it! Sign more free trade agreements! /sarcasm

[Iscool]

I know how we can fix it! Sign more free trade agreements! /sarcasm

That's exactly what Bush is doing to solve the problem...He's currently working on a 'FREE trade agreement with Malaysia...

[gafusa]

Fair Tax, deregulation, and cracking down on the unions is the solution.

[mysterio]

Cool! Now we can move more of our corporations there! I mean, Americans will be getting paid less and less every year, but think of all of the cheap stuff we will get!*










*"Cheap stuff" at participating locations. Corporations may choose to keep cost savings as profit. "Cheap stuff" does not include gasoline, natural gas, electricity, or rent.

[Toddsterpatriot]

Corporations may choose to keep cost savings as profit.

Damn those corporations and their profits. I heard that WalMart makes about 6 cents profit on every dollar of revenue. 3.6 cents after taxes. That's the financial equivalent of holding every customer down and raping them, isn't it?

Greedy Kulaks.